Venezuela: officials violate code re retroactive tax levies*

10.05.05 | In December 1958, the Chairman of the Government Junta, Edgar Sanabria, imposed a tax increase on oil companies, which was applied that same year. This measure caught the companies by surprise, as they had calculated their taxes at the current rate, and, inevitably, caused an uproar. Although the Supreme Court of Justice did not annul the measure, which applied the increase retroactively, governments since the Sanabria administration have taken care to include a rule in the Tax Code that establishes that any new tax or amendment to an existing tax should go into effect on the first day of the taxpayer’s next tax year.

In other words, when Seniat Superintendent José Gregorio Vielma Mora announced that, starting on April 18, an increase in the income tax rate from 34% to 50% would be applied to PDVSA’s 32 service contractors, he was acting in total violation of the law. Worse even was when President Chávez announced that this income tax increase would be levied on the contractors retroactively for tax years 2001 through 2004.

The euphemism that the government is latching on to in order to bend the law’s rule against retroactivity is that service companies are “really” oil companies, despite the fact that their contracts clearly establish their contractor status. In point of fact these operators are not oil companies, neither under the terms of their contracts nor on account of the type of work they perform. Besides, when the Basic Hydrocarbons Law was enacted four years ago, the government ratified that the corporate tax rate of 34% would continue to apply to service companies and that the new law would not affect their service contracts.

It is more than likely that the oil companies will absorb the blow as they did in 1958. The problem is not whether the oil companies will accept this infringement of the rules or not, nor is it a matter of objecting to the government doing its job of conducting tax inspections and identifying and correcting possible errors and omissions in the payment of taxes. What is objectionable is that the government is proceeding illegally in applying the rule retroactively and that it is not keeping its word. The harm done by this behavior on the part of the Executive is that no one that is not an oil company will be able to invest in Venezuela’s future.